Tuesday, Jun 05 2012
• 10 a.m. (ET)

New Concerns About The Global Economy

There are new signs Germany may be willing to take an even greater role in rescuing the euro. Help would be tied to more centralized control over government spending across the euro zone and could cost trillions. Europe accounts for about a fifth of the world’s economy. Financial troubles there continue to cast a long shadow over prospects for global growth.Please join us to talk about the economic and political risks of a faltering global economy.

Guests

Stella Dawson
U.S specialist, economics editor, Reuters.

David Smick
global macroeconomic advisor, founder and editor of The International Economy magazine and author of "The World Is Curved: Hidden Dangers to the Global Economy".

Transcript

10:06:56

MS. DIANE REHMThanks for joining us. I'm Diane Rehm. It's been almost four years since the Great Recession began, and, though there have been some bright spots, overall prospects for the global economy remain fairly grim. Joining me to talk about what's going on economically around the globe and how we will be affected: Stella Dawson of Reuters, David Smick, a global macroeconomic advisor, and, joining us from an NPR studio in New York City, Ian Bremmer, president and founder of Eurasia political risk consultants.

10:07:37

MS. DIANE REHMI know many of you will want to join the conversation. Give us a call on 800-433-8850. Send your email to drshow@wamu.org. Join us on Facebook or Twitter. Good morning to all of you.

10:07:57

MR. IAN BREMMERGood morning.

10:07:57

MR. DAVID SMICKGood morning.

10:07:58

MS. STELLA DAWSONGood morning, Diane.

10:07:59

REHMStella Dawson, if I could start with you, there's news this morning that Germany may be reconsidering just how much it's willing to do to save the euro. Talk about the latest.

10:08:15

DAWSONIt's very important some of the moves that Angela Merkel has indicated that she's willing to take, and they're threefold. One, she said that we have to indicate where we're prepared to go in terms of political union in order to save monetary union. So what she's doing is pressing Paris -- the other big power, France, in the eurozone -- to agree to give up some fiscal sovereignty and move together with Germany toward a fiscal union.

10:08:44

DAWSONAnd if they can agree on a basic framework to do that, she then is prepared to take the steps to bail out the big banks and help Spain. But those steps have to come together. She's not prepared to put money and bring banks (unintelligible) supervision to a euro-wide level unless there's some fiscal accountability with Germany basically in command.

10:09:11

REHMSo there's a G7 meeting to be held today. What's likely to come out of that, and what's on the table?

10:09:22

DAWSONVery interesting. Yes. The meeting was just about breaking up when we were coming into the studio. I don't have any immediate news of what was said. But we can be sure that there was a lot of pressure on Germany. You're the big guy. You're the leader here. You're the one with the biggest economy. Get this fixed. And if you get it fixed, that's going to mean that it'll help the global economy.

10:09:43

DAWSONAnd, potentially, it would provide some room for some of the central banks to come in and buy some more bonds in order to give a little bit more boost to the economy. We're not sure exactly what's coming out of this, but there's going to be huge amounts of pressure on Germany.

10:09:57

REHMHow closely were the Europeans looking at the U.S. jobs report last week?

10:10:05

DAWSONVery closely. No question at all. Ninety-six thousand over the last three months on average is very low. That means U.S. unemployment's going to go up. That means there's going to be less demand in the world economy. China is extremely concerned. It's already stimulating its economy. Brazil and India are slowing. Australia just cut interest rates today. Clear, clear concern.

10:10:27

REHMStella Dawson, she is U.S. specialist and economics editor for Reuters. David Smick, you've said the jobs report here in the U.S. was a disaster.

10:10:42

SMICKWell, I think if you'll step back at, say, and look at the world economy from 30,000 feet, it's pretty disappointing. Since the crisis you mentioned, since 2008, the world governments and central banks have spent either via subsidies or central bank injections, stimulus, an amount equal to a quarter of the world's GDP to try to prop up the system. And what is the result? That's $17 trillion. The result is about a $1.5 trillion -- or 1.5 percent global growth rate. That was before Friday's dismal numbers.

10:11:25

SMICKThat means the world economy is operating or flying at a stall speed, like an airplane that's just above the speed at which it takes a nose dive. So it's very, very serious at this point given the nature. Now, I will -- want to say one thing about the German situation. It's very important to listen to what Angela Merkel says about the timing. She says that, while we won't really consider any of this, particularly the idea of buying bonds, Eurobonds, we won't consider any of this for at least a year.

10:11:58

SMICKAnd what she means is, I can't do anything because my reelection comes next year. And if I go and support the rest of Europe and compromise Germany's credit ratings and -- which would mean higher interest rates for Germany, I'm going to be like Sarkozy or all the other incumbents. I'm going to be thrown out. So I think what I saw is a lot of nice talk from Germany. But basically, where's the beef? There's no beef, at least for a year and maybe never.

10:12:28

REHMDavid Smick, he is global macroeconomic advisor, founder and editor of The International Economy magazine. He is author of the book titled "The World Is Curved: Hidden Dangers to the Global Economy." Ian Bremmer, George Sorrows said that the European Union is working toward disintegration and that it has about three months to fix this problem. What's your reaction to that statement?

10:13:09

BREMMERWell, I mean, George has a long history of identifying bubbles that are going to burst, sometimes right, sometimes wrong, and he's been betting on this one for a while. I don't buy it. And I also think, you know, you talked with Stella at the opening that the Germans are moving, but they're moving at their pace. I thought the very -- the most interesting quote that I've seen recently on the eurozone came from Obama at the G8 Summit in Camp David where he criticized the Europeans, chided them somewhat for saying that they need to stop taking little bites and they need to take one big bite at this problem.

10:13:44

BREMMERBut, of course, the reality is the Americans had a financial crisis, and we wasted it. And the Europeans are not doing that. They're not wasting their crisis. And the reason they're not doing it is precisely because the Germans are taking little steps. And by taking little steps, they are using the market as a stick to force decisions that otherwise would be quite unpopular among the European constituencies.

10:14:12

BREMMERAnd that means a real government in Italy that's prepared to move on competitiveness and labor reform. It's meant significant austerity across the European periphery. And it's moving them towards fiscal compact and perhaps shared European sovereignty on broad fiscal issues. These are very meaningful points. And they never would have gotten there without this very painful incremental process.

10:14:36

REHMWhat about what David Smick characterizes as stall speed? Could it be that Europe is moving in too small increments?

10:14:50

BREMMERWell, it's certainly possible. There's no question it's dangerous that when you're using the market as a club, the market can move perhaps faster than you're capable of reacting. And those that are concerned about the eurozone disintegrating are fearing that. They're particularly fearing that in terms of the bank run. But I guess the way I would respond is that the Germans do have the political capacity and the economic capacity to make this work.

10:15:16

BREMMERBut they're not incented to do it until they know that we can't have crises like this ad infinitum. So there is a game of chicken, but no one's throwing the steering wheel out of the car. And, so far, I think the Germans get quite high marks for the way that they have handled and continue to handle this crisis.

10:15:35

REHMIan Bremmer, president of Eurasia political risk consultants. You are welcome to join us, 800-433-8850. Stella, I know you wanted to add something.

10:15:52

DAWSONYeah. I think Ian makes an extremely good point. What I would add, however, is that what the financial markets really need to see at this point is a clear road map. Angela Merkel has indicated that she's understanding now that we've got to say, what does political union mean, and how do we get there?

10:16:10

DAWSONBecause even if Germany does have a plan, the markets don't know what their plan is, so they're continually pushing up the yields of the Spanish and Italian debt. And, secondly, it sounds all very nice and neat, but I don't think it's quite that neat inside of Germany. There's a lot of internal dissent over what the eurozone really should look like, should Greece even be a member.

10:16:31

REHMSo where is Greece in all of this, David Smick?

10:16:36

SMICKWell, you know, on the 27th of June, there will be elections. It's -- you know, it's very difficult to know the meaning of various public opinion polls in Greece because you don't know, you know, parties -- the new democracy party may be leading, may be not, but the -- you don't know what they've promised by way of inaction. I mean, you have 80 percent of the Greek people want to stay in the eurozone, but an equal number are against the reforms.

10:17:07

SMICKAnd so it doesn't seem viable. Let me go back a little to this -- I think the German question is very, very interesting because I think Stella touched on some points. If you try to look at the eurozone through the German eyes, this is a country that, less than a decade ago, was called the sick man of Europe. They had 11 percent unemployment. They were trying to absorb East Germany. And so the -- and it was very difficult. It was -- there was austerity, big challenges.

10:17:39

SMICKAnd so the Germans were -- they struggled, but they kind of overcame this through a lot of discipline. So you can see how they would say to themselves, look, we'll help you guys, but it's a little, you know, it's time now -- we did it. Why can't you? And that's the problem Merkel's running into because she has to have some results. They have to show the kind of toughness on the fiscal side. And, of course, the difference is Germany was doing this when the global economy was booming.

10:18:10

SMICKAnd now the submerging of these periphery economies are doing it when the global economy's in deep trouble. I'll mention one other thing. If you look at emerging market -- or economies in the world over the last decade or two that have overcome big debt, not one of them did so. And I'm talking countries like Sweden and without depreciating their currencies and having a big export surge, something that the periphery in Europe can't do by definition because they're part of the eurozone.

10:18:42

REHMDavid Smick, Stella Dawson, Ian Bremmer. Short break. Right back.

10:20:04

REHMAnd welcome back. We're talking about the global economy, the issues facing Germany, Spain, France, Greece, all of them, as they strive to bring new health to not only the eurozone but the world at large. And we have three guests with us. Ian Bremmer is president of the Eurasia Group and author of the new book "Every Nation for Itself: Winners and Losers in a G-Zero World." Stella Dawson is economics editor for Reuters.

10:20:48

REHMDavid Smick is a global macroeconomic advisor, founder and editor of The International Economy Magazine and author of "The World is Curved: Hidden Dangers to the Global Economy." Here's an email from Mark, who says, "Why can't an economic system be in equilibrium and be healthy? Is it possible for a system to grow indefinitely? If not, when does growth stop? And if yes, how?" Ian Bremmer.

10:21:32

BREMMERIndefinitely is a very long time, and the data tends to mitigate against it. In part, we have closed systems in terms of resources, limitations. But we also have closed systems in terms of global cooperation. It's a lot easier to sustain growth when you have small numbers of like-minded players. Over the course of the past 20, 30 years, we've had not the rise of the rest, but the rise of the different. Those are countries that don't agree with the United States and the G7 countries.

10:22:04

REHMSuch as? Such as?

10:22:05

BREMMERWell, I mean, we just had the G7 meet on euro crisis. You'll note that the Russians weren't there. They're part of the G8, but they weren't invited. Why? They're different. They're authoritarian. They're state capitalist. They're poorer, and they don't agree with the G7 on most issues. The Chinese, the world's second largest, will be the largest economy.

10:22:26

BREMMEREven countries like Brazil and Turkey have different sensibilities -- doesn't make them wrong. But we tend not to come to agreements easily when you have larger numbers of folks that don't agree with you on most things. And this is a fundamental challenge in trying to come up with political solutions to economic challenges today.

10:22:47

REHMDavid Smick.

10:22:49

SMICKWhat I would add to that -- I think, it's an excellent point. The -- if you look at what was -- there are a lot of reasons that we got into the financial crisis. But I think the underlying reason is the global savings imbalances. I mean, you have large parts of the world tied themselves to the dollar, tied their currencies to the dollar, made them artificially weak, and that gave them trade advantage.

10:23:09

SMICKAnd countries such as China built up enormous savings imbalances, which they cycled back to the United States and other parts of the world. Of course, the favorite target of the recycling was U.S. treasuries. So what happened? The bottom line, risk in the United States and in the industrialized world -- financial risk became underpriced. There were a lot of other villains and all the rest, but the fact is it was like giving an alcoholic really cheap alcohol.

10:23:38

SMICKThey couldn't handle it. And so we are -- you look back and you say, in the four years, of all these G7, G8, G20 meetings, we still haven't corrected the imbalance problem. And so if you're a global investor, you're looking at trying to, say, chart the future, you have to look at the situation and say, these guys deserve an F. They -- you know, they -- and as Ian points out, there is no common agreement, no common game plan -- strategic game plan for growth in the world economy.

10:24:11

SMICKIt really comes down, to my view, to that. So you get -- some countries say, I want to produce steel indefinitely as much as possible, regardless of demand and the economy because administratively -- I'm talking about China -- we're going to be the steel producer. But then you end up with overcapacity. You end up with -- the market function doesn't work.

10:24:31

REHMStella.

10:24:32

DAWSONWe're trying to export our ways out of recession. That's one of the basic necessities.

10:24:35

BREMMERExactly.

10:24:36

DAWSONAnd I think, also, that we haven't figured out how to operate as a global economy. Last time that the world was getting toward this was the 1920s and 1930s, and it ended up collapse. This time, we're similarly struggling with what do you do with a integrated global economy where we've just starting to bring major emerging markets into the system. Commodity prices have gone crazy. We're suddenly realizing that a lot of manufacturing sectors have collapsed in the West. And we haven't figured out how to operate as a global economy.

10:25:07

REHMBut give me a little history on that '29 collapse. It took us until about, what, '33 to get out of it?

10:25:18

DAWSONA little longer.

10:25:19

REHMWe are now at the four-year point, and we seem to be struggling up and down, up and down. Is it because Europe can't get its act together? Is it because Greece can't get its act together? What is it?

10:25:38

DAWSONEurope's part of the problem, but is not just the problem of the United States. It's probably shaving about half a percentage point off of growth right now. But we still have here in U.S. significant savings problems, where the U.S. households have built up masses of debt, still trying to pay that down. And as David just said, we're borrowing too much from the rest of the world. The U.S. is relying hugely on borrowing from the rest of the world to pay for our government debt, and let's look inside ourselves as well.

10:26:08

DAWSONWe've got this similar political dysfunction here in the United States trying to figure out what to do with our budget. Fortunately, we have a few more years to deal with it. We're not at a crisis point where the market is demanding huge amounts of interest rates in order to finance our debt. So the U.S. does have a little bit more time. But the savings problem where we have too much debt on the balance sheets so people cannot get out and spend is what's holding back the U.S. economy.

10:26:34

REHMBut now, Ian, look at China, where apparently savings was growing. But now China seems to be having some problems in its own manufacturing sector. How is that affecting the global economic balance?

10:26:55

BREMMERWell, it shouldn't surprise anyone because, of course, the Chinese, a big part of their manufacturing sector is export to the United States and Europe and Japan, all countries that we're talking about experiencing this problematic slowdown. So the global economy is integrated. One sneezes, the other does catch a cold. But, you know, the common theme that we're describing here is this kicking the can politically.

10:27:23

BREMMERThe U.S., the Europeans, the Japanese, all have the spiraling debt issues, but they're not prepared to take the long-term steps that are needed to really address them. I would argue the Germans are coming closest to doing -- to actually really taking those steps, and the Europeans broadly. But the Chinese, no one is kicking a bigger can farther down the road than China. And the concern that they have about a slowdown is not you get some social dissent.

10:27:50

BREMMERThe concern is the viability of their regime. And so they will double-down on unsustainable infrastructure investment. They will double-down on unsustainable state capitalism practices, which are incredibly inefficient, to ensure that they can keep kicking that can. It's by far the most dangerous and volatile piece of the global economic slowdown that we're presently looking at.

10:28:16

REHMDo you agree with that, David?

10:28:18

SMICKYeah, I do agree. And I think if you look at how the Chinese reacted to the great financial crisis, they spent half of their GDP, the amount equivalent to half of the GDP, in basically loans -- or never-to-be-repaid loans and other forms of investments in infrastructure and in the banking sector to prop up the real estate sector. Now, it goes back to the -- your beginning question, where are we and what's the fundamental problem?

10:28:51

SMICKAll right. We've had a series of bubbles, a real estate bubble in the U.S., a sovereign debt bubble in Europe, and we have a series of bubbles in China. You can make a case the world now has a monetary bubble. But when you burst the bubble, governments under the influence, under pressure, try to preserve asset prices on bank balance sheets or -- and that's what China's trying to do now.

10:29:16

SMICKThat's what we did through TARP and a lot of the Fed's efforts, and that's what the European Central Bank and the individual central banks of Europe have tried to do. The problem is it's very difficult to target asset prices. Alan Greenspan, in 1986 said -- excuse me, 1996, said the stock market was -- had reached the level of exact, you know, irrational exuberance. It was only at the 8,600 level and went up to 14,000.

10:29:44

SMICKSo it's very tough. And so -- but you have elites pressuring. You got to prop up those asset values. The fact is we really don't, you know, know what those bank asset values are. All we know is we're spending a lot of effort, and we're really mortgaging the future of the middle class to try to prop up asset values. And we're not really sure what the equilibrium asset level should be.

10:30:10

REHMIan Bremmer, here's an email from Guy in North Carolina, who says, "When will the economists come to the conclusion that stimulating does not work?"

10:30:25

BREMMERWell, it's not necessarily the theoretical question of stimulating not work. It's the actual question of how stimulus gets affected in a relatively dysfunctional political system, most particularly Congress, right? I mean, this is your problem. Paul Krugman can say as much as he wants, as an academic, that we need to put money into the long-term education of the United States, infrastructure of the United States. That's great.

10:30:55

BREMMERBut then you have to take the political reality that says that much of the stimulus that was bent -- that was spent, with the exception of ensuring that the financial system didn't collapse, was wasted. And that is the nature of the sausage-making process that we have in budget formulation in Washington. That piece is ignored by economists who are working in the theoretical or the political. At some point, we have to move on to the real.

10:31:21

REHMAll right. And one last question, Stella. What about the real estate crisis in Spain, and what's going on there?

10:31:33

DAWSONYeah. This is the part that if this can be solved within the next two or three weeks, we could get a little bit more market stability. Spain needs somewhere in the region of about 50 billion put into its banks quickly. Spain may have to go to the IMF and get a bailout because its yields on its debts have risen so sharply. There is the money in Europe to put that into the banks. The basic argument that's going on is whether it goes through the government's books, which would then increase its borrowing costs.

10:32:03

DAWSONSpain wants the money to go directly into the banks. And that's when you get to the position of, well, if we're going to bail out your banks, we want to supervise your banks. I think we're going to get an answer on that within the next couple of weeks. The G20 meeting is coming up in (unintelligible) at EU summit. That would provide some type of a direction where we go next.

10:32:21

REHMStella Dawson, U.S. specialist, economics editor for Reuters. And you're listening to "The Diane Rehm Show." I'm going to go right to the phones to Arlington, Va. Good morning, Scott. You're on the air.

10:32:41

SCOTTGood morning. Thank you, Diane, for taking my call. My question was about what is the chance of Germany leaving the euro first? What keeps it in the euro right now (unintelligible) they enjoy the growth of being part of the monetary unit, why not exiting and being like Switzerland and taking this currency to the euro?

10:33:02

REHMAll right. Thanks for calling. Stella.

10:33:05

DAWSONOoh.

10:33:09

DAWSONThe chances of it leaving first, I don't think it will. I think the absolute critical thing you have to remember in all of this is that it's a hugely political project. And Germany is at the core of it. After the history of World War II or two world wars in the last century, it has been determined that it is going to be a good European citizen. It wants to have strong rules, and it wants there to be adherence to those strong rules. It will not be the first to leave. It might well try and kick others out. Perhaps David would like to talk about what the economic consequences will be.

10:33:44

SMICKOh, I think the -- if you noticed a year or so ago, the IMF came out and said, after 30 or 40 years, we're changing our position on capital controls. We now think certain developing economies with capital controls could -- may be appropriate at certain times, and...

10:33:59

REHMExplain exactly what capital controls mean.

10:34:00

SMICKThat means -- well -- real quick, it means that, you know, the exchange rates will be publicly controlled or manipulated by authorities.

10:34:13

REHMAll right.

10:34:15

SMICKAnd I noticed that the German government right at that time quietly came out and said, oh, by the way, we also retain the right to capital controls. So you say in any kind of a breakdown of the eurozone system -- and I think more likely it would be a core Europe, a very strong countries led by Germany, and then -- and the periphery countries break off. I cannot see that the German export sector, which is a phenomenal -- phenomenally powerful and successful, reinvents itself almost at any exchange rate.

10:34:47

SMICKBut that export sector in Germany, just as powerful as the Chinese export sector is in China, I can't imagine that they're going to say, OK, we're going to have these weaker economies, these periphery economies, which have been half of our -- you know, bought half of our exports traditionally, that we're going to let them leave and depreciate against this -- you know, what's left of the euro or if the -- I can't -- or the deutsche mark, although I can't imagine Germany leaving.

10:35:13

SMICKSo I think Germany, in the back of its mind, says, if ever we got into that situation, we will do -- we may not do capital controls, but we'll do something that seems like that to make sure that we don't have an overvalued currency. And you say, how can they do that? Well, the Chinese do it all the time, and the Japanese do it. And it's -- it is the new norm in a global exchange rate management.

10:35:36

10:35:43

JOHNThank you. Since Bretton Woods, the U.S. has had a great advantage of having the dollar as the world trade currency, reserve currency. China has recently outwardly challenged that in many ways by setting up agreements with individual countries now around the world to exchange it for resources. They're also been a net buyer of gold for quite some time.

10:36:05

JOHNSo we've been freeloading, in fact, with our fiat money. What's going to happen to our standard of living if China actually displaces us, if we give them a great advantage to have their currency as the world trade reserve currency? Thank you.

10:36:18

REHMIan Bremmer.

10:36:19

BREMMERWell, first of all, let's recognize that the freeloading works both ways. If you want to paint it in that normative way against the U.S., you'd have to say that a lot of other countries are freeloading on the U.S. provision of public goods, global security and the rest. So, I mean, you know, it's a global system, and the U.S. has set those terms. The U.S. has done a lot of lifting. It is very clear that in today's global environment, with everyone worried about massive volatility in the markets and a slowdown, that you focus more on safety.

10:36:52

BREMMERAnd when you focus on safety and resilience, you turn more to U.S. treasuries, which is why the dollar is actually very strong in this environment and likely to get stronger. Now, the danger there is that the U.S. ends up with what I call a safe haven curse, which is that we're not pushed -- Stella mentioned this before. If we don't want to deal with our deficit next year, we don't have to. Standard & Poor's, in their eminent wisdom, downgraded the U.S. It had no impact. They can do it again, but you do need to take this opportunity to make the long-term investments. That, we're not doing yet.

10:37:26

REHMIan Bremmer. He's president of the Eurasia Group and author of a brand-new book titled "Every Nation for Itself: Winners and Losers in a G-Zero World." Short break, and your calls when we come back.

10:40:04

REHMIan Bremmer, I'd like to come back to you and ask you about the title or rather the subtitle of your book, "Winners and Losers in a G-Zero World." What does that mean? What is a G-zero world?

10:40:22

BREMMERIt's a world without global leadership. You know, we've spoken earlier in the hour about the Bretton Woods Agreement. You've got the IMF, the World Bank and all these institutions that came out of World War II where the United States created them with its values, its priorities, its economic and political system and its allies. That system is over, and it really was -- came to an abrupt halt with the financial crisis. And we created a G20 with the idea being the world's 20 largest economies would all provide that form of leadership.

10:41:00

BREMMERBut the reality is the U.S. is less willing to be the lender of last resort with Europe. There's no Marshall Plan coming from Washington. They are less willing to be the world's policemen, less willing to lead globalization. Our allies, like the Europeans and Japanese, are maximally distracted with their own domestic crises, and the other countries like the Chinese, the Russians, the emerging markets, have neither the willingness nor the capacity to provide that leadership. So instead of a G7 or a G20, what we have is a G-zero.

10:41:36

REHMAll right. During the break, David Smick, Stella Dawson and I were talking about the fact that David said that nothing is working, neither austerity nor stimulation. But if the U.S. were to move forward on a major stimulation program to restructure, to rebuild highways, to do the necessary restructuring, Ian Bremmer, could that provide an example to the world and perhaps spur other countries in the same direction?

10:42:21

BREMMERWell, there's no question that we have the space, geopolitically and geoeconomically, to do that. The question is, will we be seen to do it effectively, or would the money be wasted? If a large stimulus that would truly invest in America's future were to be made, I think people would be doubling-down on the United States right now. There's no question.

10:42:45

BREMMERAnd I think it would have an impact more broadly. The political system and the extraordinary polarization between Democrats and Republicans, as well as the entrenchedness of special interests in the United States does mitigate against that likelihood.

10:43:02

REHMDo you agree with that, David?

10:43:04

SMICKWell, I think -- you know, I think building bridges, that sounds like that's an answer. But I think we have -- the economy has a more fundamental problem of maybe even an innovation gap. If you look back to 1973 when oil prices quadrupled, what you saw since '73 is a stagnation in wages and salaries. And you, you know, I mean, a lot of people wonder if, since '73, you know, we -- the innovation gap has held back our level of prosperity. You know, you think of the rise of the computer and all the rest.

10:43:42

SMICKBut, you know, the theory is that the innovations and the computerization of the economy have -- while impressive, have not compensated for the significant increases in real energy cost. And if you look at even something like medical technology where you say, man, we are so far ahead. You know, a third of those patents are running out in the next two years. We're going to see an increased decline in innovation.

10:44:13

SMICKNow, there are -- traditionally, I think even conservative Republicans would have to admit there have been two sources of innovation spending by the government over the last -- in the post-war period, and that's military spending and NASA. NASA is gone, and military spending is being dramatically curtailed. So my concern is that we're going to see even a diminished innovative America if we're not careful. We need to spend on new innovations. How do you target new innovations? Very, very difficult.

10:44:45

REHMStella, you were shaking your head in disagreement.

10:44:48

DAWSONRaising my eyebrows.

10:44:50

BREMMERMe too.

10:44:51

DAWSONI would disagree that the U.S. hasn't been innovative. When you look at Apple computer, it's absolutely revolutionized how we use social media, Facebook, Google, just to name a few, absolutely radical and a worldwide impact. On energy costs, energy costs falling. I mean, obviously oil is very much dependent on global markets right now. But as we're developing new technologies to extract natural gas through hydraulic fracturing, there's the potential for the U.S. to become energy independent.

10:45:23

DAWSONAnd that'll bring down our costs in the long term. Yes. I absolutely agree that there's very much more that could be done on the tax side, on immigration side in order to ensure that we have the brightest and the best who can stay in this kind of study.

10:45:34

REHMBut you do have a stalemate right now.

10:45:37

DAWSONWe do over those issues, yes. There is a need for political leadership.

10:45:39

SMICKOK. But I...

10:45:40

REHMOK. Hold on, David.

10:45:43

DAWSONBut in terms of the innovativeness of the Americans, it's absolutely unparalleled worldwide.

10:45:47

REHMIan Bremmer, we have an email from Bob, and I think this is the question everybody wants answered. He says, "The somberness of this discussion has gotten my attention. The conclusion I reach from comments is that we are on the verge of a worldwide economic crisis that will make the recent U.S.-centric crisis look small. Am I drawing the wrong conclusion?"

10:46:21

BREMMERHe is. And he is, in part, because there is much more resilience in the system. The United States and Europe are experiencing great difficulties, but it's not like we're seeing demonstrations in the streets. Even in Greece, it's been incredibly constrained. Spain is still fundamentally a rich country. Nobody -- no one's asked about Occupy Wall Street. They haven't for several months because America is too comfortable. When the world's largest economy is still very comfortable, you're not on the brink of collapse.

10:46:54

BREMMERBut let me also take issue with the notion that the U.S. can innovate. I certainly agree with Stella on things like fracking. The U.S. has not had dramatic reductions in defense funding. That's ludicrous. There are going to be some constraints. But overwhelmingly spending more than anyone else out there, this is still a relative gain. And if you think about the big issues like nanotech and biotech and energy and where you're going to see the next new thing, still, those are either dominated by the United States or a little bit by our allies, who are likeminded on the way the global economy should work.

10:47:31

BREMMERIt's not China. It's not India. It's not Brazil. The problem the U.S. has is that increasingly large numbers of Americans don't participate in that growth. And over time, if you don't invest in them, you will have a mounting underclass that doesn't believe that they want the United States to continue to lead globalization because they don't benefit from it. That's not a near-term problem. It's not a five-year problem. But it's a generational challenge that we need to start addressing 'cause if we don't, then we will see our political system start to break.

10:48:05

REHMBut we've got the world awash in liquidity. We hear that all of these banks, all of these corporations are sitting on billions, even trillions of dollars. Where is all this money going to go, Ian?

10:48:27

BREMMERWell, so far, it's going to the shareholders, and, you know, most of the shareholders for American corporations are American. So a lot of Americans have done very well. But a lot of Americans have seen none of that because, of course, these corporations aren't hiring in the United States, and those manufacturing jobs are gone. Yet you can put stimulus policies in that will improve a sector on the margins. But globalization has meant that many Americans no longer have the capacity to work competitively in a global economy.

10:49:00

BREMMERThey're not going to starve. They're not going to revolt. But they will increasingly be peeved in a serious way. And when I say you need stimulus, I accept what David said. We don't need to build bridges. You do need to close the innovation gap. And the way you do that -- the innovation gap isn't between the United States and China. The innovation gap is within the United States. We need more people to be able to work for companies like Apple and Google. That's where we need the stimulus.

10:49:28

REHMDavid.

10:49:29

SMICKI think that if you look at the growth rate from World War II to the year 2000, about 3.2 percent on average, since 2000 up to the financial crisis, 2.4. It sounds like a small difference, but that's the 10 million additional unemployed people. That's kids who can't get jobs after they come out of college. And during this period since 2000, supposedly we've had this innovation renaissance. It's been wonderful. Supposedly, it's done wonderful things.

10:50:05

SMICKWhy isn't the growth rate at least 3.2 percent as it was during the post-war period? I think we're living an illusion that we've -- because elites can play with an iPad. Oh, that's changed. Take the -- take Apple stock out of the stock market and tell me what the stock market's performance has been in the last few years. Dismal.

10:50:25

REHMAll right. Ian Bremmer, you take that.

10:50:29

BREMMERThere's no question that the United States has had diverse companies and a diverse economy, and some have produced better than others. But you are absolutely right, Diane, that there are many, many companies right now in the United States that are washed in capital. And they are washed in capital because they're global corporations, and they've been investing globally. But they're not investing overwhelmingly in the U.S. population.

10:50:53

BREMMERAnd that's not -- that's Coca-Cola. It's not just Apple. Those guys are in 208 countries. They do 1.8 billion transactions every single day. Nobody out-globalizes Coke, but they're not hiring as many people in the United States as they used to. That's like -- when you talk to them, their big growth markets are Africa. And they are China, and they're India. Well, you know, a lot of Americans are going to see that.

10:51:18

REHMStella.

10:51:19

DAWSONA lot of Americans will see that, but those who have already got to see it...

10:51:21

REHMHave already seen it.

10:51:23

DAWSONThose who are going to see the benefits are those who actually own the stock, and those are going to be the upper-middle class and the corporate shareholders and then the corporate executives themselves. We do have a real growing problem in this country of the gap between the rich and the poor. You get out of the metropolitan areas, you get out of the coasts, and you see huge differences.

10:51:44

DAWSONAnd those are the people who used to have good jobs before they all went overseas and now can only get the minimum wage jobs packing at Wal-Mart or something. So that is a significant problem that certainly is holding back the potential for the U.S. That has to be addressed as part of a rebalancing.

10:52:02

REHMHow?

10:52:03

DAWSONHow, politically...

10:52:03

REHMYeah.

10:52:04

DAWSONI think it gets back to the politics again, when there's such a huge division between the Democrats and the Republicans on refusing to address these issues.

10:52:14

REHMDoes it simply mean you provide more incentives for Coca-Cola and other large corporations to keep those jobs here in the United States? Ian Bremmer.

10:52:28

BREMMERI think it's unlikely. And I think we need to recognize the U.S. is a country where multinational corporations are still dominant in terms of their ability to ensure that regulatory policy favors them. I suppose you could say that the good news is that that means that the antipathy towards globalization, despite the fact that it's growing in the United States, can continue to be rough -- ridden roughshod on for many, many years before the U.S. policy will be changed.

10:52:59

BREMMERSo the U.S. will still do lots of things, will support free trade, will support the kinds of policies that will benefit top-line U.S. growth for much longer than it would in other countries. The downside is you are dealing with what is a very big can that you are kicking down the road. It is -- it's ultimately going to create unsustainability of this trajectory. And so you either need a very strong president who is prepared with the majority to say this is my issue, not health care, but this is my issue. Obama had the opportunity.

10:53:30

BREMMERI think one reason he's -- the people are so disappointed with him right now is precisely because they feel that, you know, as smart as he is and as broad as he is, he just didn't address the fundamental issues that have been driving America apart.

10:53:45

10:53:57

NATHANGood morning, Diane.

10:53:58

REHMHi.

10:53:59

NATHANMy comment was, a few moments ago, one of -- either yourself or someone else had cited that either stimulus or austerity wasn't working, and my thoughts on that would be rather that it's not working but that neither one has been tried long enough for it to work. If you'll remember post-war in the '40s, everybody had the same ideological thought of doing their part, but nobody -- there doesn't seem to be that continuity between the global authorities.

10:54:29

REHMStella.

10:54:30

DAWSONI think you put your finger on it. Suddenly, they've been trying austerity in Europe. The difficulty there is that it's driven the countries further and further down the hole of getting deeper, deeper into recession, and then the government debt costs go higher and higher because they haven't had the privilege of being able to devalue their currency and grow their way out of the recession.

10:54:51

REHMDavid, Ian Bremmer just mentioned health care and President Obama. What specifics does Gov. Romney have that he would do differently to help the global economy?

10:55:11

SMICKWell, I can't speak for Gov. Romney. I gather he, you know, would like to have a reform of the tax system. And I think, you know, that's probably a good thing. I would go back to the question of...

10:55:23

REHMA reform of the tax system that would...

10:55:25

SMICKRight. Broaden the base, lower rates. Certainly, there's a call for that on the corporate side to -- I think there is a kind of a cancer growing within the -- a cancer of crony capitalism that kind of pervades our system. And I think it has really created a value issue in America where people question the fairness of the system. And I would argue that crony capitalism is practiced by both parties. Whichever party gets in power, it becomes the masters of this new art for this time -- hold this long-lasting art form.

10:56:00

REHMAll right. I want to give Ian Bremmer just a few seconds to comment on what the U.S. could do differently. Do you see differences between Mitt Romney and Barack Obama that could be of assistance to the global economy?

10:56:21

BREMMERI see big differences between them on lots of issues, budgetary and health care and taxation and the rest. They are unlikely to be significant if you have Romney winning but a filibuster proof -- but not a filibuster proof set in for the Republicans or Obama takes a second term -- it still looks a tiny bit more likely -- but he has Republicans controlling House and/or Senate. Usually...

10:56:48

REHMAll right. We'll have to leave it there, I'm afraid. Ian Bremmer, he's president of the Eurasia Group and author of "Every Nation for Itself: Winners and Losers in a G-Zero World," Stella Dawson, economics editor for Reuters, and David Smick, founder and editor of The International Economy magazine and author of "The World is Curved." Thank you all so much.

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